With returns that have doubled the market since the 1960s, billionaire investor Warren Buffett’s moves are closely followed around the world. And thanks to his investment firm’s latest regulatory filings, we’ve just discovered where he’s been allocating his capital in today’s market.
During the third quarter of 2024, Buffett made some adjustments to his existing positions at Apple and Bank of America. But he’s also added two new businesses to his portfolio: Pool Corp and Domino’s Pizza (NYSE:DPZ).
Given his tremendous track record, should investors follow in his footsteps and buy shares in these businesses?
Digging into the details
Out of the two businesses, Buffett seems more bullish on Domino’s when looking at the amount of capital invested in each. Roughly $150m was spent buying 404,000 shares of Pool. However, closer to $550m was allocated to the pizza franchise chain. So let’s zoom in on the latter.
Despite being in the restaurant business, Domino’s Pizza was actually one of the top-performing stocks in the 2010s. After revamping its recipe and launching a digital ordering and delivery tracking system, sales and earnings soared. And between 2010 and 2020, that translated into the share price skyrocketing by almost 2,400%! And don’t forget about the extra gains from dividends as well.
Today, the demand for pizza remains strong. Yet the shares seem to have lost their momentum, climbing by only around 10% over the last four years. So is this Buffett taking advantage of an under appreciated business trading at a fair price?
Why did Buffett buy Domino’s?
We’ll have to wait until the next earnings meeting to find out exactly what Buffett’s thinking here. Nevertheless, we can still make some educated guesses.
For starters, Domino’s definitely seems to have a wide competitive moat that Buffett loves to see. The group has a well-respected brand with a reputation for quality and an industry-leading online ordering system that provides real-time updates, ensuring the best possible experience for customers.
When leveraging the regular offers and discounts, the pizzas are also priced attractively. As such, demand didn’t take much of a hit, even as inflation went rampant throughout the US economy in recent years. The result was pretty resilient earnings that have continued their upward trajectory.
What about the valuation? This is where Buffett seems to divert from his usual strategy. Why? Because Domino’s Pizza currently trades at a price-to-earnings ratio of 26.5. By comparison, the industry average is closer to 21, suggesting that the stock’s a bit on the pricey side.
As such, the shares could be a bit volatile if earnings were to fall short of expectations – something that’s happened before. This premium valuation may also be justified, given the quality of the underlying business. Yet there’s also the risk of self-cannibalisation to consider.
With so much growth under its belt already, international expansion may be the only effective lever left in management’s growth toolkit. And that also opens the door to currency exchange risks.
Personally, I’m not tempted to add this business to my portfolio right now. Buffett might have spotted something that everyone else has missed. But until investors gain insight into this investment decision, it’s impossible to know for certain. The same is true with Pool Corp.
